Muzinich Weekly Market Comment: Diplomacy, policymaker style

May 7, 2024

In our latest round-up of developments in financial markets and economies, we look back at a busy week for economic data and policymakers.

The first week of every month is usually dominated by a deluge of critical economic data. This can set the tone for market sentiment and the direction of asset prices for the rest of the month.

In May, we add into the mix quarterly earnings reports, the second quarter debt financing needs of the US government, and a drop in liquidity due to national holidays (Labour Day in Europe and Golden Week in Japan).

While investors buckled their seatbelts for the anticipated rollercoaster of data-driven price action, as things transpired, markets were guided more by diplomacy and central bankers.

Not so golden?

In Japan, the data released during Golden Week pointed to a possible contraction in first quarter growth with consumer sentiment, retail sales and new housing starts all disappointing.

Although industrial production picked up in March, on a quarterly basis it fell 5.4%, the worst performance since the second quarter in 2020.¹ However, markets shrugged off the news, as the dovish policy tone set by the Bank of Japan the previous week and rising US government bond yields left currency markets with only one objective — sell yen, in what hedge funds are starting to dub a “one-way” bet.

The yen briefly touched 160 versus the US dollar before policymakers, clearly not in holiday mode, surprised and intervened twice last week — before and after the Federal Open Market Committee (FOMC) meeting on May 1. Those interventions reportedly came at a cost of Y3.5 trillion (US$22.5 billion).²

The Yen closed the week 3.3% stronger versus the US dollar, helping to weaken the greenback across global currencies for the second week in a row.

Is China getting ready to up the ante on stimulus?

Elsewhere In Asia, China’s official and Caixin manufacturing purchasing manager indices positively surprised as manufacturing activity remained in expansionary territory for the second successive month.³ This suggests there is momentum behind the growth narrative, as we also saw in recent export and domestic investment data.⁴

However, it was the Politburo of the Chinese Communist Party — or to give its official title, the Political Bureau of the Central Committee of the Communist Party of China — that captured investor attention, as it warned of the risks of fiscal support coming too late.⁵

The Committee called for faster issuance of special Chinese government bonds and said it will analyse measures to destock existing housing and optimise new supply. This is the first time the government has mentioned destocking since 2015, when it followed through with a huge shantytown redevelopment programme.

Local media reports also suggest the government is considering launching a national programme to acquire unfinished projects from property developers and allow local governments to acquire secondary inventory from homebuilders for home upgrades.⁶

Is this China’s moment to launch its own version of the Troubled Asset Relief Program (created by the US government in 2008 in response to the global financial crisis)? Time will tell, but any programme that would allow property companies to convert inventory into cash would significantly help them with their ongoing cash shortfalls. Additionally, any redressing of the supply/demand imbalance would support house prices.

Capital markets reacted positively, with the Hang Seng rallying a further 6.5% over the week, while non-distressed bonds issued by Chinese housebuilders rose in price by between 5 and 10 points.

Hope for peace?

In the Middle East, we saw hopes growing for a possible breakthrough in the region’s geopolitical crisis, with US Secretary of State Antony Blinken suggesting Hamas has been presented with an “extraordinarily generous” ceasefire proposal by Israel.⁷ Blinken’s statement was followed by Hamas saying it will study the proposal for a temporary ceasefire in a “positive spirit”.⁸

This was the catalyst for commodity prices to fall, with energy prices closing 5% lower last week and gold breaking below the psychological 2,300 level.

A ceasefire would likely continue to push commodity prices lower and, in the best possible scenario, open shipping distribution channels in the region, which should help accelerate global disinflation.

Taper Tantrum take two?

In the US, government borrowing requirements for Q2 were increased from $202 billion to $242 billion due to lower-than-expected tax receipts.⁹ The Federal Reserve announced that, as of June, it will reduce monthly sales of government bonds from $60 billion to $25 billion, a dovish surprise. Redemptions of mortgage-backed securities will remain unchanged at $35 billion per month.¹⁰

However, the main event in the US last week was the Federal Reserve policy meeting on May 1, with investors waiting to see whether the FOMC would execute a “hawkish pivot” to increase rates, in effect triggering another “Taper Tantrum” moment.

In the event, policy rates remained unchanged and Fed Chairman Jay Powell gave a clear signal of intent to the market, saying it is unlikely the next policy rate move will be a hike.

For now, the FOMC is focused on how long to keep policy restrictive, needing either a significant weakening in the labour market or confidence in reaching its inflation objective to start cutting rates.

Maybe Powell had insight into the release of critical US economic data last week, which turned out to be softer than anticipated. Consumer confidence fell to its lowest level since 2022,¹¹ manufacturing activity surprised by contracting, with the ISM manufacturing Purchase Managers Index falling back to 49.2,¹² while employment numbers were weak across the board, with unemployment unexpectedly rising to 3.9%.¹³

Guardians of the Galaxy?

If diplomacy is the politics of peace and central banks the buyers of last resort, both could be seen as the guardians of stability.

It was a good week for diplomats and central bankers, as demonstrated by our preferred measure to gauge volatility, the VIX, which fell below 15, a level typically associated with calm in financial markets.¹⁴

Chart of the week: Has the Bank of Japan drawn a line at 160 versus dollar?

Source: Nasdaq, as of May 3, 2024. For illustrative purposes only.

References

1.Ministry of Economy, Trade and Industry, as of April 30, 2024
2.Bloomberg, ‘Japan likely spent $23 billion in latest yen intervention’, as of May 2, 2023
3.National Bureau of Statistics, as of April 30, 2024
4.The State Council of the People’s Republic of China, as of April 16, 2024
5.Reuters, ‘China to step up support for economy,’ as of April 30, 2024
6.Xinhua News Agency, April 30, 2024
7.Reuters, ‘US, Britain urge Hamas to accept Israeli truce proposal,’ April 29, 2024
8.Bloomberg, ‘Hamas says truce deal being studied in positive spirit’, as of May 2, 2024
9.US Department of the Treasury, as of April 29, 2024
10.US Federal Reserve, as of May 1, 2024
11.The Conference Board, as of April 30, 2024
12.Institute for Supply Management, as of May 1, 2024
13.Bureau of Labor Statistics, as of May 3, 2024
14.CBOE Global Markets, as of May 3, 2024

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of May 2024, and may change without notice. All data figures are from Bloomberg, as of May 3, 2024, unless otherwise stated.

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